Rodriguez Sees Another Crisis Coming

Top strategist Bob Rodriguez of FPA sees a financial crisis coming in the next few years that will be at least as big as the Great Recession, and he thinks a bear market is coming in 2015.

“We’re living on borrowed time,” Rodriguez told Think Advisor. “When this market breaks, you’re going to see so many money managers and others washed out to sea who will never see land again. It will happen between now and 2018.”

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Rodriguez says the economy is far worse than many believe, as the government and corporations haven’t really addressed the issues that led to the 2008 crisis. “The federal government isn’t controlling their spending,” he says. “For the past two years, 60% of investment returns have been a function of P/E expansion. Earnings growth is being driven by a fair amount of financial engineering on the part of the Federal Reserve and corporations. … Is this a vibrant economy? Absolutely not. I don’t know what people are smoking! No amount of monetary stimulus that’s driving up the illusion of stock prices is going to get back to the basic elements of improving fundamental elements in the economy. Debt and entitlements are growing at more than twice the rate of nominal GDP growth. It’s an absurdity!” He says that his forecast for 2015 is a stock market that “will be easily 20% or 30% lower from what it is now.” He adds that he is finding very few attractively valued stocks right now.

Rodriguez also talks about his overall approach. “Being successful in longer-term investing requires five elements,” he says. “The first is discipline: You have to have discipline in how you analyze your securities. The second is patience to wait for those securities to present themselves in an attractive way. Next is the most difficult: courage. You have to have the courage to execute when all else says don’t. Then you need patience again — to allow those investments to work out over a period of time. … [Then] you need discipline again to sell because you’ve been correct or to sell because your analysis has been incorrect.”

Rodriguez also talks about why the most important chart to look at is the dollar index and why he thinks a currency war may be coming. And he discusses why the current level of corporate buybacks has him worried.